Tuesday, September 16, 2008

10 Ways to Survive a Financial Meltdown...

Courtesy of the Wall Street Journal with my comments:

1. Check that your bank accounts are federally insured. The Federal Deposit Insurance Corporation (FDIC) guarantees deposits up to $100,000 per person. If you have to hold more than that, spread it across multiple banks.

* This is a no-brainer, just watch your kids accounts that have your social security number - they can easily push you over the $100,000 limit.

2. Make sure your brokerage accounts are federally insured, too. The Securities Investor Protection Corporation (SIPC) guarantees you at places like Lehman Brothers, Merrill Lynch, E-Trade and the like up to $500,000, including $100,000 worth of cash.

* This is a little confusing - they don't guarantee the value, just insure that someone can't fold up and take your securities with them.


3. Put money in thy purse. If this market and this economy get any tougher, cash is king. The easiest way to make or find a buck is to save it. So take an axe to those family budgets. The restaurant meals. The Super Duper Everything Cable package.

* It shouldn't take a financial crisis to do this - every 6 mths step back and look where your money is going - you'll be stunned what you spend on latte's.

4. Set up a home equity line of credit while you still can. I usually don't like advising people to take on more debt, but if access to ready cash might be a life saver it's best to line it up. That's especially true if you are worried about your job. Credit is already tight, and it may get a lot tighter still.

* It's tough to even dignify this with a response. Let me try - Hey dummy, Home Equity lines are a big part of the problem right now. Asking people to go get another line is crazy talk. If you really want to tap that equity in your house, sell your 4,000 sq ft McMansion and move into a smaller place.

5. Refinance your mortgage. The panic on Wall Street just caused a collapse in the interest rate on long-term US Treasury bonds, as lots of investors rushed there for safety.

*This is amazing but true. Rates are down and if you can get refinanced and you plan on staying in your house for 7+ years maybe you should refinance. I'm stunned that despite our financial turmoil US government debts are viewed as a flight to safety. This will change at some point in the near future.

6. Stop pulling a Monty Python when it comes to your worst investments. If you ever saw John Cleese and Michael Palin perform their famous skit about the dead parrot, you know exactly what I mean. No, your Fannie Mae shares aren't "resting." They're lying at the bottom of the cage with their feet in the air. What more do you need to know? So stop waiting for them to "recover" before sorting out your portfolio.

* If you're a long-term value investor there might be opportunities to bottom feed on some great companies, but for most investments in Lehman, Fannie, Freddie it's true that you should liquidate.

7. Don't panic. Journalists, like markets, tend to move in herds. And by the nature of their jobs they write about the plane that crashes instead of the thousands that land safely.

* Hmmm, sounds like something that was said to the musicians on the Titantic. Nothing to see here - keep playing - don't panic - move along. This could be the beginning of the great financial calamity of our time and a little bit of panic might be a good thing.

8. When it comes to your short-term money needs, nothing has changed. Any money you might need within the next year or two should be held in cash or equivalents. That was true two years ago and it is true now. The stock market is no home for money you may need urgently. It could fall 30% or jump 30%. Nobody knows. You can get a one year CD paying 5% right now, and it's federally guaranteed.

* Agreed, but look at the 10 year chart on the Dow or S&P and you will see that stocks have gone virtually nowhere for 10 years. That's not a good thing if you're a long-term investor. I've said for some time that we are in the midst of a Japanese like recession that could hold US stocks in check for 10 to 25 years.

9. If you are investing for five years or more, buy some stock. The investment outlook is much, much better today than it has been for several years, because shares are much cheaper. World markets overall have fallen 27% from last year's peak. They're not a steal at current levels but they are not particularly expensive either.

* Agreed - Invest globally, but start slow and because world stock markets are going lower from here be prepared for declines.

10. If you want to worry about anything, worry about your taxes. The worse this crisis gets, the more they will end up putting the taxpayer on the hook to prevent a meltdown. Taxes are going up sooner or later anyway, no matter who wins the election, because of our gigantic federal deficits.

* I don't think worry, is the right word, but it's true - taxes are going to go up or spending has to go down sharply, or more likely a combination of both. It's not the popular thing to say, but like Randy Pausch said - Tell the Truth, All the Time. Wouldn't it be nice if politicians could do the same instead promising more silly tax cuts.

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